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MW: U.S. economy posts slowest growth in three years, first-quarter GDP shows

WASHINGTON (MarketWatch) â€” The governmentâ€™s official scorecard for the U.S. economy pointed to the weakest growth in the first quarter in three years, but the slowdown appeared tied to temporary effects that are likely to give way a rebound in the coming months.

Gross domestic product increased at a meager 0.7% annual pace in the first three months of the year, down from 2.1% and 3.5% in the back half of 2016. Economists polled by MarketWatch had forecast a 0.9% increase.

In premarket trading, futures pointed to a flat opening for the Dow Jones Industrial Average DJIA, +0.03%
The dropoff mostly stemmed from the smallest increase in consumer spending since the end of 2009, largely reflecting fewer sales at car dealers. Consumer outlays rose just 0.3%, a steep drop from the 3.5% gain at the end of 2016..

Government also reduced spending and businesses scaled back on inventory production to make sure they didnâ€™t get stuck with lots of unsold goods on warehouse shelves.

The pullback in consumer spending is unlikely to last, though.

Americans spent less on gasoline, home heating fuel and clothes after a spell of unseasonably warm weather in February â€” the second hottest on record. Thatâ€™s unlikely to be repeated in the spring.

More important, household finances are in the best shape in years amid record stock market gains, a strong labor market and gradually rising wages. Americans have more money to spend and thatâ€™s reflected by rising home sales.

In the first quarter, investment in home building climbed 13.7%, marking the construction industry as a major engine of U.S growth. The biggest problem in the real estate market is a lack of properties for sale.

Another tailwind for the economy is business spending. Companies are investing more in structures such as drilling rigs and office buildings. So-called fixed business investment increased 10.4% and accounted for bulk of U.S. growth in the first quarter, a marked contrast to the prior two years when it was often an albatross.

Yet even though corporate America is brimming with optimism about a pro-business Trump White House, itâ€™s shed none of the caution itâ€™s exhibited during a stutterstep eight-year-old economic recovery. Companies barely increased the production of goods.

The value of new inventories was the other big drain on first-quarter growth. They rose by just $10.3 billion in the first quarter after a roughly $50 billion increase at the end of 2016.

Government spending fell 1.7%, the largest drop in four years.

Trade, another key part of the economy, was largely a wash on first-quarter results. Exports climbed 5.8% while imports rose 4.1%.

Meanwhile, Inflation advanced at a 2.4% annual pace in the first quarter, according to the PCE price index. The PCE, the preferred inflation gauge of the Federal Reserve, easily topped the centralâ€™s bankâ€™s 2% target for the first time in several years.

Yet the core PCE that strips out the volatile food and energy categories was little changed at 2%, underscoring the big effect oil prices have in U.S. inflation. Oil prices have leveled off after a runup late last year, suggesting moderation in price pressures.